Tenants with no security deposit

10 Replies

Hello All,

I'm seeking the collective wisdom of the BP community to try and get some insight on a situation involving a pending RE transaction.  Here's the scenario...

We are currently under contract to buy a few rowhomes that have current tenants without a security deposit.  As part of the attorney approval process, one of the things I asked for was a certified rent roll and estoppel agreements for each tenant.  This is how I discovered that 3 of the tenants do not have security deposits with the current owner.  Their tenancies are also month-to-month verbal leases.

So, I asked my RE broker to convey to the seller that this was unacceptable, so either the tenants would have to be evicted or security desposits collected.  My rationale was that I as the buyer would assume all the risk for these units after closing.  So if a tenant vacated and trashed the unit (or had to be evicted, or stopped paying rent, etc.), I would have no recourse for that financial hit except a small claims court judgement (which probably isn't worth the paper it's written on).

My question is - what would you do?  Is this an unrealistic expectation of me on the seller?  Would you assume the risk to buy the buildings?  (There are 8 total units.)  Anyone have any other creative solutions?  (Maybe the seller puts some money in escrow until the tenants pay their security or vacate...)

I'm anxious to hear some feedback.  I know RE investing comes with risk, but is this the kind of risk I should accept at the risk of cancelling the contract (and incurring legal fees for work done already)?

Thanks in advance!

The escrow approach might be the way to go. Another way is estimate cost of rent and eviction proceedings and deduct from price .This is not a normal situation and it might be that the landlord is accepting rent in cash to avoid taxes.play hardball and prepare to say goodbye unless the above mentioned risks still make it a good deal 

Sometimes the best deal that you make is one that you don't. ( sounds like a quote from Yogi Berra)

Hey Wesley.  My thoughts are how good is the deal?  If you are getting it 10K below where you think the value is then why bother?  if the deal is pretty marginal, yes ask for a deduction or set off in price.  In reality the deposit is not yours in any event except damage or non payment of rent.  I wonder if these tenants were take anyone you can get tenants to make the cash flow look better for the sellers in which case they probably did not check them out very carefully.  The deal here is what matters.  I don't think it is realistic to have them evicted before buying.  What if you back out at the last moment and they have lost 4 tenants?  Good luck

No idea...what would you do. Your individual circumstances will dictate the correct course of action. However, no lease=no buy with "tenant" for me. Too much legal headache to eliminate these people if they don't pay me.

Renegotiate the deal to cover the lack of security deposits...

I would want this cured before I closed. There are too many unanswered questions. Three out of eight units? If it was one unit I might accept that. You are talking almost 50%. Do you have any idea how long these tenants have been there? As one other poster mentioned, they might have been an easy way to make income look better. 

It's a consideration to factor in the purchasing price. I always assume:  no security deposit = bad tenant = possible 'no pay' = eviction. I have not had an instance where a tenant without a security deposit has not turned into trouble, but I do typically purchase underperforming properties, or mismanaged complexes.  You may have a different experience. But expecting him to evict, or collect a security deposit is unreasonable. 

We had this situation with one of our purchases.  To us the most important point was the the tenants agree that they have no security deposit.

We talked to our inherited tenant, had him sign our M2M rental agreement, and he has lived with us with no deposit for five years now.  Am I thrilled that we don't have a deposit?  No.  Does it really matter?  No.

Our deposits often don't make a dent into the cost of a bad move out, and the tenants disappear and don't have any resources to chase anyway.  For us it is a cost of doing business.

I'm not an expert by any means but couldn't you attempt to increase the rent by say $25-$50 a month for the first year and tell the tenants with a years worth of on time payments you will drop it back down? Allows them to feel like they may get a benefit at the end and you can collect some extra rent that could be stashed as a security deposit.

Originally posted by @Rich S. :

I'm not an expert by any means but couldn't you attempt to increase the rent by say $25-$50 a month for the first year and tell the tenants with a years worth of on time payments you will drop it back down? Allows them to feel like they may get a benefit at the end and you can collect some extra rent that could be stashed as a security deposit.

I could,  but I am going under the assumption that they might not want to stay too long when (1) I have them sign a written lease,  (2) require them to pay on time or give them a "pay or quit" notice when they don't, and (3) increase their rent up closer to market.

I might not have any problems,  but I'd rather hope for the best whilst preparing for the worst.  And chances are, with this demographic,  there will most likely be problems,  especially since I am the "new sheriff in their town."

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